Advanced laboratory in financial risk management

COURSE OUTLINE (TENTATIVE)

1. Wednesday May 6 8:30 AM to 10:30 AM, Aula 25
Lecture 1: Introduction to Financial Risk Management
Hull ch 1, Questions and Problems (Q&P): 1, 3, 4, 5, 6, 17, 18, 19, 21, 22, 23. Plus Practice Exam

Project I: Option Trading Strategies
Class will be divided into groups. Each group will be assigned 10,000 Euros plus a trading strategy such as Long Stock/Short Call for a mildly bullish sentiment. You will need to select a stock or Exchange Traded Fund (ETF) plus a related put or call. These are very heavily traded in the U.S. (sorry I am not familiar with European Exchanges). You will need to log on to the NASDAQ website to keep a daily record of prices; of course, I will show how to do this. We will review the results the last day of classes. More details in the handout.

2. Wednesday May 8 8:30 AM to 10:30 AM, Aula 24
Lecture 2: Introduction to Options
Hull ch 9, (Q&P): 1, 2,3, 9, 10, 11, 12, 15, 21. Plus Practice Exam
Note: There are quite a few technical rules about options (e.g., Commission schedules, adjustments for stock splits and dividends) that are quite boring to learn and very easy to forget. You can learn more about these rules if/when you start trading options for your own account. Please read the chapters and just be aware of their existence; but you are not required to know them for this course.

3. Thursday May 9 8:30 AM to 10:30 AM, Aula 21
Lecture 3: Introduction to Futures Contracts.
Hull ch 2, Q&P: 1, 3, 4, 5, 7, 11, 16, 17, 21. Plus Practice Exam
Lec 4: Hedging Strategies Using Futures.
Hull ch 3, Q&P: 6, 7, 18, 21, 24. Plus Practice Exam

4. Monday May 13 8:30 AM to 10:30 AM, Aula 25
Lec 5A: Arbitrage-Free Pricing of Forward and futures (Hull, Ch. 5)
Lec 5B: Currency futures, Forward Contracts, and Hedging Currency Risk (Hull, Ch. 5.10)
Hull ch 5, Q&P: 2, 3, 4, 9, 10, 12. Plus Practice Exam

Project II: Trade Futures Contracts in class.

5. Wednesday May 15 8:30 AM to 10:30 AM, Aula 22
Lec 7: Swaps. Hull ch 7 Q&P: 1 and 2, plus Practice Exam
Lec 10: How to discover Options Prices (Bounds on Call and Put prices)
Hull ch 10, Q&P: 2, 3, 7, 9, 10, 11, 12, 14, 15. Plus Practice Exam

6. Thursday May 16 8:30 AM to 10:30 AM, Aula 21
Lec 11: Options Strategies. Hull ch 11, Q&P: 1, 4, 6, 7, 10, 11, 12, 15. Plus Practice Exam
Lec 12A: Binomial Option Pricing Model (BOPM) for Calls

7. Monday May 20 8:30 AM to 10:30 AM, Aula 25
Lec 12B: Binomial Option Pricing Model (BOPM) for Puts.
Hull ch 12, Q&P: 1, 4, 5, 6, 12, 13, 14. Plus Practice Exam
Lec 12C: Dynamic Asset Allocation

Lecture 13A: From Binomial Pricing to the Black-Scholes Option Pricing Model (No Dividend case)
Hull ch 13. The key idea here is the Black and Scholes model in section 13.7. The model is just a formula (like a cooking recipe) to find the option price. I hope you can obtain some intuitive understanding by focusing on the derivation in the lecture notes. Most of the end of chapter problems are not interesting; basically, they ask to "plug-in some numbers and get an answer". Problems #4, 16 and the Practice Exam are okay. The Black and Scholes formula will be provided on the exam (along with tables for N(d1) and N(d2) ).

8. Tuesday May 21 8:30 AM to 10:30 AM, Aula 25
Project III: Trade Options in virtual time.

9. Wednesday May 22 8:30 AM to 12:30 PM, Aula 2
Excel Exercises for Options (In the computer lab).

10. Thursday May 23 8:30 AM to 10:30 PM, Aula 27
Review Investment Project Results.